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Puxin Limited (NEW) Q1 2019 Earnings Call Transcript

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Puxin Limited (NYSE: NEW)
Q1 2019 Earnings Call
May 20, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Puxin Limited First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tip Fleming of Christensen. Mr. Fleming, please go ahead.

Tip Fleming -- Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining Puxin's first quarter 2019 earnings conference call. The company's results were released earlier today and are available on the company's IR website at http://ir.pxjy.com/.

On the call today are Mr. Yunlong Sha, the company's Founder, Chairman and Chief Executive Officer; and Mr. Peng Wang, Chief Financial Officer. Yunlong will give a brief overview of the company's business operations and highlights, followed by Peng, who will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows.

I will remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

With that, I will now turn the call over to Mr. Sha. Mr. Sha will read through his prepared remarks -- in Chinese. I will translate for him in English. Mr. Sha, please go ahead.

Yunlong Sha -- Founder, Chairman, and Chief Executive Officer

(Foreign Language) Hello, everyone, and welcome to our first quarter earnings conference call.

I'm pleased to report that we made solid progress in the first quarter. Net revenues grew 24.2% year-over-year to RMB616 million, exceeding the top end of our guidance by 4.2%. The solid performance was mainly driven by organic growth, especially in student enrollments which increased by 54.1% to 402,061 during the quarter.

In terms of business lines, our K-12 education segment grew rapidly with 38% year-over-year rise in revenue. This organic growth was impressive indeed, given that we took a prudent approach to opening new learning centers during the quarter.

We believe one of the most important metrics for after-school tutoring institutions is the retention rate. During the quarter, our retention rate reached 81.3%. Student retention largely reflects students and parents perception of the quality of the school's teaching and services. We believe our high retention rate demonstrates the solid integration of the schools that we've acquired over the past few years. We've worked very hard to ensure that at each of the acquired schools, we improve and standardize both the teaching, content and approach in all of our classrooms. The approach has clearly been well received by parents and they can see the results based on their children's academic performance.

If you look at our P&L, our gross profit for the quarter increased by 26% year-over-year, while our gross margin rose about 45%. Meanwhile, our total operating expenses decreased by about RMB130 million or 24% year-over-year. Net loss attributable to ordinary shareholders improved by 29.9% compared with the first quarter of 2018. We achieved these results by standardizing products of what we call our central kitchen and by developing it carefully refined management structure that this helps us avoid burning money, which is often seen in the K-12 industry. This as truly helped us drive healthy and sustainable organic growth. We further created value for shareholders by implementing cost controls over our operating expenses relate to human resources, administration and marketing.

Overall, we are particularly pleased to narrowed our loss while achieving solid top line growth in the first quarter. With our unique acquisition plus integration model, we've proven that we can successfully acquire and then renovate and integrate newly acquired schools in about eight quarters. In addition, on the launch of our online education business in the first -- fourth quarter of last year, we're looking forward to further exploring what is known as an OMO model or Online-Merge-Offline model, in the education market in China.

With that, I would now like to turn the call over to Peng, who will go over the financials.

Peng Wang -- Chief Financial Officer

Thank you, Mr. Sha and Tip. Hello, everyone. Please be reminded all amounts quoted here will be RMB, and all percentages increases will be on a year-over-year basis, unless otherwise stated. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

So to start. Net revenues were RMB615.7 million, an increase of 24.2% from the first quarter of 2018. As Mr. Sha has mentioned just now, this increase was primarily due to the increase in student enrollment. Student enrollment increased 54% to 402,000 from 261,000 in the same period of last year. Cost of revenues was RMB335.6 million, an increase of 22.7% from the same period of 2018, primarily due to an increase in teacher compensation.

Non-GAAP cost of revenues which excludes share-based compensation expenses was RMB334.2 million, an increase of 22.6% from the first quarter of 2018. Gross profit was RMB280.1 million, an increase of 26% from the same period of 2018. Gross margin was 45.5%, compared with 44.8% for the same period in 2018. Total operating expenses was RMB416.6 million, a decrease of 24% from the first quarter of 2018.

Selling expenses were RMB222.6 million, an increase of 35.2% from the first quarter of 2018. Non-GAAP selling and marketing expenses, which exclude share-based compensation expenses were RMB215.5 million, an increase of 32.7% from the first quarter of 2018. The increases were primarily due to a rise in selling and marketing staff compensation.

I'd like to add a few words about the selling expenses increase. The driver for this selling expenses increase was mainly the increase of selling expenses in the study-abroad test prep business line, for our study-abroad test prep business line, the cash revenue was increasing in the first part of this year quite rapidly, but, due to the nature of the business, the revenue of this line grow at a mild pace. So, in terms of selling expenses associated with compensation for our staff, we give incentive based on the cap revenue. So if we look at the selling expenses based on the revenue, the increase was significant, but if we compare the selling expenses to the correspondent cash revenue, those numbers will be much -- be mild.

G&A expenses were RMB194 million, a decrease of 49.4% from the same period last year. The decrease was primarily due to a decline in share-based compensation expenses. Non-GAAP G&A expenses, which excludes share-based compensation expenses were RMB107.8 million, an increase of 6.5% from the first quarter of last year. Total share-based compensation expenses allocated to related operating cost expenses was RMB94.7 million, a decrease of 66.8% from the same period of 2018. The decrease was primarily because fewer options were granted to employees in the first quarter of '19.

Operating loss was RMB136.5 million, a decrease of 58.1% from the first quarter of 2018. Operating margin was negative 22.2%, compared with negative 65.7% for the same period in 2018. Non-GAAP operating loss was RMB41.8 million compared with RMB40.4 million in the first quarter of 2016 -- 2018. Non-GAAP operating margin was negative 6.8%, compared with negative 8.1% in the same period of the prior year.

Net loss attributable to Puxin Limited was RMB248.8 million, a decrease of 29.9% from the first quarter of 2018. Basic and diluted net loss per ADS attributable to Puxin Limited were RMB3.02 compared with RMB6.10 during the same period of 2018. Non-GAAP net loss attributable to Puxin Limited was RMB73.8 million compared with RMB45 million during the same period of 2018. Non-GAAP basic and diluted net loss per ADS attributable to Puxin Limited was RMB0.90 compared with RMB0.78 during the same period of 2018.

EBITDA was negative RMB191.9 million, a decrease of 41.7% from the same -- from the first quarter of 2018. EBITDA margin was negative 31.2%, compared with negative 66.4% on the same period in 2018. Non-GAAP EBITDA was negative RMB16.9 million compared with negative RMB19 million in the first quarter of 2018. Non-GAAP EBITDA was negative 2.7% compared with negative 3.8% in the same period of the prior year.

Next, we'll move onto the balance sheet. As of March 31, 2019, we had total of cash and cash equivalents of RMB666.6 million, compared with RMB778 million as of December 31, 2018.

Finally for guidance. For the second quarter of 2019, we expect net revenues to be between RMB611 million to RMB637.6 million, which represents an increase of 15% to 20% year-over-year. This forecast reflects the company's current and the preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks. I will now turn to -- hand the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Frank Lu with Axiom Investments. Please go ahead.

Frank Lu -- Axiom Investments -- Analyst

Hi management. Congrats on a good quarter. I just have a quick couple of questions. Firstly, do you hope -- update the timeline for overseas profitability, just when should we start seeing profitability in the overseas unit? And then also maybe an update on this outlook for K-12 growth maybe for next months also the rest of the year, and maybe just say a couple of things more on your online strategy? Thank you.

Peng Wang -- Chief Financial Officer

As to the profitability of the chance to study-abroad test prep, as Frank as you asked now, we acquired the two large institutions of test prep, study-abroad test prep global education. And in the third quarter of 2017, at that time, both companies were losing money for Global Education, its revenue was RMB600 million and net loss at RMB120 million. For ZMN, the net loss raised even higher. So as we have mentioned in the IPO at the prospect, it nearly took us eight quarters to turnaround the underperforming school or the company. So, we are looking at a breakeven or next to breakeven situation for Global Education, and due to the business nature of ZMN, which is kind of a high-end consulting firm instead of us tutoring, it's revenue as I mentioned just now, about the selling expenses for ZMN, we're expecting a lower pace of the breakeven, not in this year, probably in the first half of last year -- of next year. So in one word, the study-abroad test prep will not make profits in this year. But given the fact that Global Education, we're making a big loss in the year of 2017, we expect the Global Education to be either breakeven or next to breakeven, which is still a big progress. So that's the -- my reference to the first question you mentioned.

And as to the growth of our case with our segments, we are looking at the organic growth of our 30% or above. That's on an annual basis. And as to the third question of the online business. I'm pleased to say that our online business is growing in the organic way, it's not burning money, but it's growth is quite impressive. We're instead, leveraging the offline students online. We tried to expand into the lower-tier cities with our online programs, which will be very promising. If we consider the possibility of OMO, which in the online and offline programs, so, that's about our online business.

Frank Lu -- Axiom Investments -- Analyst

Got it. Thank you.

Operator

Your next question comes from Calan (ph) Zu with Deutsche Bank. Please go ahead.

Matt Jones -- Deutsche Bank -- Analyst

Hi, management. Thank you for taking my question. This is Matt Jones. I'm asking question on behalf of Calan Zu. So my first question is about what is the reason, your increasing operating loss. And can you please give us more color on the OP margin guidance like for next quarter or full year. Thank you.

Peng Wang -- Chief Financial Officer

Okay. Thank you, Matt. Thank you for your question. As I mentioned just now, the main driver for the increase in operating loss or the operating expenses, was the selling and marketing expenses, and if we break down the selling and market expenses into two business line, which are study-abroad test prep, we can say that most of the -- that the increase in the selling, marketing expenses, were due to the test prep business line. And the reason of that increase was that -- cash revenue of both Global Education and ZMN have been growing at a -- even see and our compensation mechanism or for our sales person, are mainly related to their -- to the cash revenue instead of revenue. So, given the fact that the revenue pace is a little bit lower than the pace of cash revenue, and we pay -- we reimburse the sales person based on the cash revenue. So, if we divide the selling expense by revenue instead of cash revenue, it seems that the ratio of selling and marketing expenses has been increasing. But later on, as most of this cash revenue will become revenue, step-by-step, we are looking at a decreasing rate of selling and marketing expense in the following quarters. And accompanied by this decrease in selling and marketing expense, our operating margin will be on the track of the improvements in the following quarters.

Matt Jones -- Deutsche Bank -- Analyst

Thank you management, that's very helpful.

Peng Wang -- Chief Financial Officer

Yes. Thanks Matt.

Operator

(Operator Instructions) The next question comes from Chris Shay (ph) with Cipher Atlas. Please go ahead.

Chris Shay -- Cipher Atlas -- Analyst

(Foreign Language) I will translate my question of and myself, and I have two question then first is can you provide the breakdown of the growth of the business in the K-12 as rather GDU, and the (inaudible) in Q1, and the later on how is the growing trend -- growth trend in this year going forward. And, in the skill set that my second question is related with the business segment margins and the same the earning was deported by the recognition and after revenue as we are as a cost and especially for the business segment and after GDU and the ZMN and I want to know, say, if we look at that business separately, and the health operating margin of the K-12 and how about the cash margin after the GDU and the ZMN, and which has maybe longer -- even longer in revenue recognition mechanism and under the new accounting treatment.

(Foreign Language)

Peng Wang -- Chief Financial Officer

Thanks, Chris for the two questions. I'll answer the two question in English. First, as to the growth rates of K-12 and study-abroad test prep. For the first quarter, the growth rate for the K-12 business line was 37% plus and the growth rate for the study-abroad test prep business line, we've seen low -- was in low single-digit, mainly due to the basis nature of the test -- the study-abroad test prep. The cash revenue, in fact the cash revenue of the study-abroad test prep business line was quite good, for GDU it's over 20% and for ZMN is over 35% for the cash revenue. But again, the revenue was increasing at a much slower pace, so that's for your first question.

If we look at the cash revenue or the cash margin of the study-abroad test prep business line, first, we can say that both GDU and ZMN are increasing at a -- in an amazing speed, in terms of cash revenue. It means, it has two -- it has impact on two aspects. First of all, those cash revenue will become revenue later on step-by-step, quarter-by-quarter. So, we are expecting a increasing speed for the revenue recognition in the following quarters.

And thus, we also expect those COGS looks cost and expenses, including selling and marketing expenses will be driven down, accompanied by the process, so if we look at the margin of K-12 and study-abroad, K-12 gross margin right now is almost just 46%. And for the -- our study-abroad test prep business line, the gross margin is higher, is over 50% and we are expecting that margin to grow for the same reason I must mentioned just now. If we look at the cash margin of the study-abroad test prep business line, I can say it's over 60% for now. So that's for your second question.

Chris Shay -- Cipher Atlas -- Analyst

(Foreign Language) Thank you. Thanks for the answer.

Peng Wang -- Chief Financial Officer

Thank you Chris.

Operator

(Operator Instructions) Since there appears to be no further questions, this will conclude our question-and-answer session. I would now like to turn the conference back over to Tip Fleming for any closing remarks.

Tip Fleming -- Investor Relations

Thank you, operator. In closing, on behalf of the entire management team, we'd like to -- thank you for joining. Thank you again for your participation on today's call. If you have any further inquiries in the future, please don't hesitate to contact us or the company directly. Thank you very much.

Peng Wang -- Chief Financial Officer

Thank you.

Operator

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 33 minutes

Call participants:

Tip Fleming -- Investor Relations

Yunlong Sha -- Founder, Chairman, and Chief Executive Officer

Peng Wang -- Chief Financial Officer

Frank Lu -- Axiom Investments -- Analyst

Matt Jones -- Deutsche Bank -- Analyst

Chris Shay -- Cipher Atlas -- Analyst

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